Little to cheer about in CSO data as recession persists

 

ANALYSIS:It would be prudent to wait for next quarter’s figures before declaring an end to the downturn, writes PAT McARDLE

SOME WILL say that the third-quarter national accounts released yesterday by the CSO, show the recession has ended, but this is to miss the woods for the trees. True, Gross Domestic Product (GDP) grew by 0.3 per cent but another measure, Gross National Product (GNP), contracted by 1.4 per cent. I prefer the latter measure which tells us that we are not out of the woods yet.

It’s very confusing and the figures are preliminary estimates subject to revision. For example, three months ago, second-quarter GDP was flat. Now, it has been revised to minus 0.6 per cent. The same could happen to the latest numbers. A prudent person would wait for at least two successive quarterly figures before pronouncing one way or the other. The CSO, conscious as ever that they are statisticians rather than forecasters, would not be drawn beyond saying that the picture was mixed. This is a reference to the fact that one measure was up, the other down.

GDP is not a measure of the standard of living, though it is often portrayed as such. In fact, it is the total value of all goods and services produced in an economy in a given period. GNP on the other hand is the total value of all goods and services produced in an economy in a given period that accrue to that country’s residents.

The difference between them is made up of net factor flows, which include net profit repatriation by multinationals, interest on the foreign component of the national debt and inflows to Irish owners of foreign assets. In our case, GDP is significantly larger than GNP because of the big multinational activity which boosts GDP, but nets out of GNP. In the third quarter for example, GDP was €40.8 billion while GNP was 21 per cent less at €32.2 billion.

In other countries, there is usually little difference between them and GDP is the international standard. For example, government deficits under the Stability and Growth Pact are always expressed as a percentage of GDP. This works to our advantage. Frequently, however, it is the other way around.

Anything expressed as a percentage of nominal GDP – Government spending or tax revenue – is understated by about 20 per cent, by comparison with GNP. Multinational output in the chemicals, pharmaceuticals and ICT sectors is very buoyant of late. This boosts GDP growth, but the profits do not accrue to Irish residents. Instead, they show up as net factor outflows, which are deducted to get GNP.

There are two other important factor flows. Inflows to Irish residents from their overseas subsidiaries were down and interest on foreign debt was up.

The recent Budget indicated that the debt interest bill next year will be up €1.2 billion, much of will go to non-residents. So GNP will likely remain lower than GDP and continue to grow at a slower rate. Since the peak in activity in 2007, real or price-adjusted GDP has contracted by 10.1 per cent and GNP by 15.4 per cent. The latter is a measure of how worse off we are in income terms.

These figures correspond to contractions from peaks of 6 per cent in the UK, 5 per cent in the euro zone and 4 per cent in the US. Our problems are definitely more severe but not unique.

The boost from multinational activity is largely transitory. They appear to be able to up their output without taking on extra labour. This fuels higher profits, which are repatriated, leaving little impact on Irish income.

Interestingly, the GDP concept is more relevant to employment. Since the peak, employment and GDP are down about 10 per cent. We can expect some further falls.

The data reflect contraction in the domestic economy. Consumer spending, which was up 0.9 per cent in the second quarter, fell by 0.7 per cent in the third. Investment was down 9.9 per cent. Driven by housing, it has been negative for nine of the last 11 quarters and has more to fall.

Government spending on wages also began to contract and has more to go. On the output side, manufacturing was flat, but this concealed multinational growth offset by a large contraction in domestic activity.

Net exports seemed to be a bright spot. However, there are two caveats. First, they are boosted by multinational activity referred to above. Second, the main part of the boost came not from stronger exports but from much reduced imports. Again, this is hardly a sign of strength.

There is little in the data to cheer about. We will have to wait for the fourth-quarter data next March to see if the economy has ceased to contract.